This paper shows the strategic aspects of international outsourcing in an
oligopolistic market, if outsourcing is attractive because of fixed cost
savings. We show that outsourcing decisions are strategic substitutes.
Furthermore, we demonstrate that due to decreasing individual output,
intensified competition increases the incentive to save fixed costs of
integrated production and thus leads to more outsourcing. Additionally, we
analyse how domestic costs and taxation affect the equilibrium level of
outsourcing and employment. Here, we find that lower domestic costs
decrease the proportion of outsourcing and therefore, increase employment.
Concerning the impact of taxation, we find that a lower consumption tax on
output decreases outsourcing. In case of a reversed outsourcing motivation,
where outsourcing is associated with lower marginal costs but higher fixed
costs than the domestic production, we show that the opposite effects
concerning competition and taxation occur.

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